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My brother came to me to borrow money to pay some taxes that are due by the end of this year.

The only way I can get the requested amount is by selling mutual funds. As you know, the US stock market has been quite volatile, losing around 7% last week alone. Rather than specify an exact interest rate, I would like to say that when the money is paid back, they (he and/or his heirs) will just pay me enough to buy back the same number of shares in the same mutual funds. This might be less than the price I sell at tomorrow, but it also could be 15 or 30% more by the time I'm paid back.

Does this sound like an acceptable rate? I want to know if, in your opinions, I'm being usurious.

For the record, my brother and his wife say this is OK, and in the past he has offered (without my requesting it) to pay any IRA early withdrawal penalties, capital gains tax, and credit card interest incurred from the loans, which can easily inflate the loan by 10% to 20%.

To address some of the points raised in the answers:

The loan is to cover taxes on his home and on the rental properties that I co-own with him. He spent all the rental income on property expenses and on his own expenses, and there's nothing left to pay the taxes. If we don't pay, we may lose the properties.

It may be a terrible idea, but he has nobody else to turn to.

He doesn't make enough at his job to get a bank loan. He owns 1/3 of the cost of his house; the other 2/3 are mortgaged to me and our late father. Nothing has been paid toward the mortgages for the past 20 years, so he can't get a home loan.

Friends and his wife's family won't lend them anything. He sold our late father's brokerage-held stocks (including my portion) via a joint bank account, and the rest of the stock is being held by the state as unclaimed assets. I gave him pieces of my savings when he periodically came to me at the end of the month saying he can't risk having his health insurance cancelled, and at the end of the year when he needed to pay property taxes. When I ran out of savings, I let him use two of my credit cards. They are maxed out (as is our late father's credit cards), so selling stock is all I can do now.

My request was in fact influenced by my belief that the stock market will recover. All I want is to be made whole again. I've lent him cash with 0% interest rate, for example when he says "I need $500 right now to prevent a check from bouncing and you'll get it back next week." But when I have to sell property like stock, or hypothetically, my house, with 5 days' notice to get him money, what I want to say is that I want the same stock (or an equivalent house) back, no more, no less.

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    He can't get a bank loan. His wife's family won't lend them money at all. He sold your inheritance. You've given him some of your savings. He maxed out your father's and your credit cards. And NOW you want to give him MORE money? Sorry to sound harsh but there's a limit to brotherly love. If you own the home and hold the paper, take the beating on the house and if necessary, the property taxes (non payment by your brother). He'll have a roof over his head. The rest is his problem. Stop draining your resources on a lost cause.
    – Bob Baerker
    Dec 24, 2018 at 17:13
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    After all of your edits that illustrate that there is no shot of this loan being paid back until after you're all fighting in probate, it's fair to point out that now what you're doing is forcing your brother in to a short position that any reasonable person would advise against even if he knew the risks and wanted to do it. The problem with unhedged short positions is that it could be +10% or +30% or +5,000%. It's barely advisable for even extremely knowledgeable people to take a position like that.
    – quid
    Dec 24, 2018 at 22:14
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    You used the word 'acceptable'. Are you asking if it's enforceable if you need to go to court, or if members here would find such an offer reasonable? If I were you, I would want to separate my own financial interests from this guy, 100%. At the rates he seems to be going, he'll have nothing, and you'll have worthless IOUs.
    – JTP - Apologise to Monica ♦
    Dec 26, 2018 at 15:53
  • I'm asking if, in their collective educated opinion, members here think I'm being usurious.
    – Dev1
    Dec 26, 2018 at 17:01

5 Answers 5

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In general this is a terrible idea. 1. lending to family. 2. lending at a variable rate. 3. no specified end date.

Surely you must have cash sitting somewhere and the amount your brother would like to borrow is well within the amount of cash sitting around otherwise you wouldn't dream of lending money to someone. So, if you must lend money to a family member (terrible idea) just use the money sitting in your emergency fund and set a reasonable predictable interest rate.

When I was young I was told that the first rule of investing is the return of your money, not the return on your money.

Despite what you (the collective you meaning people in general not you specifically) may think about banks, lenders want their money back. Interest rates are supposed to provide an incentive to return money, every day that I keep your money I incur a little more cost.

If you lend $1,000 at 10% interest, sure you'll profit 'only' $100 compared to the marked which returned, say, 16%. But if the money isn't repaid, you're not out the $100 of interest, you're out the $1,000 you lent. You should definitely not lend anyone any money if you think the risk of lending is that you might have gotten a better return in whatever security. Your brother might not pay you back. THAT is the risk of lending money. You're not dealing with the difference between +10% and +16%. It's the difference between +10% and -100%.

When you apply a potentially extremely volatile benchmark rate you may be inadvertently giving your borrower an incentive to not give back your money. They have now an incentive to wait and see what the benchmark does tomorrow when deciding to pay you back. If the 25 shares costs $2,000 now, maybe it will only be $1,800 tomorrow, I should wait and see. The opposite is true also I better pay it back because it could be up tomorrow. But the number may get to a point that your borrower can't pay; then you revert to delaying to tomorrow in the hopes that the market is down. This is also why loans tend to have periodic mandatory payments with due dates and non-payment penalties because the lender wants its money back. No lender wants a $35 late fee more than it wants the $10,000 it lent you back.

Additionally, (since you mention heirs) there are laws in many jurisdictions specifying maximum interest rates individuals are allowed to apply to lent money. So if you're in a position where someone's heirs are paying this debt back, you may have someone knock the debt back below what would be the maximum applicable interest rate. And again, if your concern at all is heirs, you're not appreciating the risk of lending is WAY different than the risk of buying a registered, publicly traded, SEC regulated, SIPC protected security.

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  • While this loan is inadvisable, it's not quite as crazy as it may sound. In effect, OP and others who own stocks are likely already making such loans, to unknown people, through hypothecation that allows a broker to lend their stock to short sellers. OP's brother would effectively be a short seller. The key difference is that short sellers have to put up margin against the risk of default if stocks rise. They cannot simply withdraw the borrowed funds and spend them.
    – nanoman
    Dec 24, 2018 at 1:16
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    Ya no. What your broker does behind the scenes with your stock doesn't add one iota of risk to you. That is not in any way comparable to an actual loan where you actually lend the money. I get that you can make the comparison to a short sale but the risk is not in the same universe. The question here is about a loan that ignores the basic risks of lending.
    – quid
    Dec 24, 2018 at 3:29
  • Turns out I have bonds in my 401(k) which are not as volatile as stocks. But selling them means income tax, a 10% penalty, and possibly disqualifying my Medicaid.
    – Dev1
    Dec 26, 2018 at 14:39
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In all fairness to your brother, you would be benefit from the loss deduction on your taxes and such an agreement should take that into account as well.

However, I can't fathom why anyone would accept such an agreement. Your brother becomes the pseudo short seller (without ownership and benefit from the short position) yet he bears 100% of the upside risk should the price of your shares sold recover. He then has to pay 5%, 10%, 20% or who knows how much more for this loan. Bad deal !

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  • There's only a loss if shares were bought in a very specific timeframe (past few months). anything before that might incur additional taxes for the sale of the stocks.
    – xyious
    Dec 24, 2018 at 16:54
  • Anything is possible since the OP did not specify cost basis. I inferred that he has a loss since he made a point of mentioning that the market has been down, "losing around 9% last week alone". Either way, if there's a gain then that should also be taken into account. It's still a bad idea, either way.
    – Bob Baerker
    Dec 24, 2018 at 17:05
  • yes, completely agree with your point.
    – xyious
    Dec 24, 2018 at 17:07
  • I'm looking at an $1800 capital gain on $10K. This would be my first and only transaction in a taxable account this year.
    – Dev1
    Dec 26, 2018 at 14:51
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With the additional information in the question, I don't think it matters what terms you set up the loan under because you will never get the money back. Your brother is not living within his means and you have been enabling him, to the extent that he now requires you to liquidate your retirement funds to continue to support him. Until he lives within his means, he will not accumulate extra money he can use to pay you back.

At this point, I think you have two options: give him the money outright and be ready to continue giving him money going forward OR sell the property, divide the proceeds, and cut him off from further financial assistance.

I recommend the latter as he will have to fend for himself at some point and you already have to deal with the financial mess he has left you without adding fuel to the fire by draining your retirement accounts.

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A short stock position requires that the shares be returned in the future and also requires an interest rate for the amount of time that the stock is borrowed. The interest rate is of course the margin interest rate.

Well, a short stock position borrows the stock shares, sells the shares, and accounts the cash received for the shares sold. In an actual margin account situation, the cash would most likely stay in the account since the stock shares have to be re-bought in the future. In a private agreement, anything could be done.

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This could very well end up being a very high rate, which could cause resentment, difficulty repaying, and could be considered usury. With a flat interest rate, you are exchanging the risk of the market for the risk of the loan. With your plan, you would be getting both risks. You seem to be anticipating a feeling of regret if the stock market goes up and you miss out, but you shouldn't let your financials be driven by "could'ves". If the market goes up, he doesn't "owe" you the difference: yes, you missed out on the rise because of the loan, but the loan also meant you missed out on the risk.

That being said, the additional information you gave is quite worrisome. There are three main attributes to a good loan: there's a good reason they need the money, there's a good reason to expect they'll have the money later, and there's good reason to think they'll pay you back if they have the money. You're missing at least two of these. Your brother has chronic financial problems and your description gives no reason for thinking that things will change to the point that he will be able to pay you back. You say that he's sold off all of the inheritance, including your portion, he's maxed out your credit cards, he's saddled you with a mortgage that he's not paying, and now you're think of wiping out your life savings. This is the sort of relationship that people normally have with Nigerian scammers, not their brothers. Asking whether you should ask for a flat interest rate or the value of the stocks you sold is like the Raiders asking whether they should print up Oakland Raiders Super Bowl LIV Champions t-shirts or Las Vegas Raiders Super Bowl LIV Champions t-shirts. You need to be thinking about your financial survival, because the way things are going, your brother is dragging both of you into bankruptcy.

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  • Sorry, I didn't mean to imply that all the inheritance has been sold off. There's still some stock being held by the state as unclaimed assets, but my brother (as executor) is so busy that he has no idea when he'll have time to process the estate.
    – Dev1
    Dec 26, 2018 at 15:00
  • I'm willing to get back less if the market goes down, and the agreement says that.
    – Dev1
    Dec 26, 2018 at 15:21

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